Provisional Tax is a way of paying your income tax as the income is received through the year. You make provisional instalments of income tax during the year, based on what you expect your tax bill to be. The amount of provisional tax you paid is then deducted from your tax bill at the end of the year.
There are two ways of working out your provisional tax. One is the standard option and the other one is the estimation option. If you are also registered for GST and meet the other eligibility criteria, the GST Ratio option may be available to you as well (see below for more on the GST Ratio option).
The IRD automatically charges provisional tax using the standard option unless you choose the estimation or ratio options. The standard option is based on an assumption that your income will be similar to the previous years.
The standard option takes your most recent Residual Income Tax and makes an adjustment to work out Provisional tax payable. Your Residual Income Tax was your overall tax liability after subtracting any tax credits (excludes provisional tax paid), and it is clearly labelled in your most recent tax return.
- For 2016 year provisional tax we'll use 2014 RIT plus10% or 2015 RIT plus 5% whichever is the latest Income Year filed.
You will only be liable for provisional tax if the amount calculated is greater than $2,500
The other way to work out your provisional tax is to estimate what your residual income tax will be. When working out the tax, keep the following points in mind:
- To get the right tax rate -
- Add up all your estimated income
- Work out the tax on the total
- Subtract any tax credits (like PAYE)
- Using the estimation option, if your estimated residual income tax is lower than your actual residual income tax for that year, you may be liable for interest on the underpaid amount
- You can estimate your provisional tax as many times as necessary up until your last instalment date. Each estimate must be fair and reasonable
- We often use this for companies becasue the IRD charge use of money interest at a lower threshold than for individuals.
The due date and amount of instalments you need to make for payment of your provisional tax each year depends on your balance date, which of the above options you use and how often you pay GST (if registered).
If you file monthly or two-monthly GST returns and you haven’t selected the ratio payment option, you’re required to make three provisional tax payments each year. If you file six- monthly GST returns you're required to make two provisional tax payments.
For example; If you have the following one of the following balance dates, and are 2 monthly GST registered, provisional tax payments are due:
If you have a 31 March balance date, provisional tax payments are due on:
|First instalment||28 August|
|Second instalment||15 January|
|Third instalment||7 May|
If you have a 31 May balance date, provisional tax payments are due on:
|First instalment||28 October|
|Second instalment||28 February|
|Third instalment||28 June|
In some circumstances you may be charged interest if the provisional tax you paid is less than your residual income tax. If the provisional tax you pay is more than your residual income tax, the IRD may pay you interest on the difference.
Another Option – the GST Ratio Option
If you are registered for GST, you may be able to pay your provisional tax at the same time as your GST payments. This will be of benefit to the cashflow of those who have fluctuating Income and Turnover throughout the year. You will be able to use the ratio option if:
- You’ve been in business and providing GST Returns for all of the previous tax year
- Your residual income tax for the previous year is greater than $2,500 and up to $150,000
- You file your GST returns every month or every two months
- The business you’re operating is not a partnership
- Your ratio percentage that IRD calculates for you is between 0% and 100%
This method of paying provisional tax may not suit everyone and we suggest that you discuss this with your accountant before deciding on this option.
For further information on provisional tax give us a call or refer to the IRD Website.
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